At least we have light.
We have lighting straight in your eyes. All right. Morning, everyone, and great to see everyone back in the room. We are extremely pleased to have the management team of Banco de Sabadell. I was thinking, when you think about European banking resilience through pandemics, wars, and bids, Banco de Sabadell has to come to mind one way or the other. We are extremely pleased to have Marc Armengol, Group CEO, and Sergio Palavecino, CFO. Thank you both for coming.
Thank you.
Thank you for having us.
There is a lot of things that I would like to discuss with you, but maybe the best way to go about this is to look at the last 12, 18 months. They have been rather eventful for you. As we have alluded to, you survived a tender offer, another one. You have sold your U.K. business. Marc, you have joined as new CEO. Maybe we can start by you running us through your thoughts, how you see fundamentals in this environment, and maybe share your first impressions as CEO on things the bank is doing well and where maybe the bank needs to do a bit more work.
Thank you very much, Antonio, and good morning, everybody. Indeed, we've been through a lot, right? I'd say that probably the most meaningful event has been the sale of our U.K. business, TSB. That has brought Banco de Sabadell into a bank that is more of a pure domestic player in Spain. We now have most of our activities in Spain, which is a country that is performing very well, and probably we can speak about that a little bit later. I think it gives us, for a bank our size, the right span of attention and the right focus on the activities we need to perform very well. Sabadell is a bank that comes from a story of SME banking. We have, throughout all this period, remained very close to our customers.
We continue to have a, let's say, a very strong capacity of execution that we continue to show quarter after quarter, delivering what we have committed. We have a highly engaged team. After the tender offer process, I think that a little bit as a result of that, our employees got to a highest ever level of engagement that we are keeping down the way. I would say that our starting point, as we look forward in terms of our growth potential, couldn't be better. I think that that's pretty much what I believe that we are doing well. When I think about what we should improve, I think we probably will need to become a little bit sharper on our strategic mandate for the different segments we are serving.
Probably we will be looking forward to growing in a more aggressive way on high value segments, and that means continue to grow on SMEs, grow in a meaningful way on private banking, on personal banking. On the segments where in a way we have had probably higher levels of sophistication than what we needed, we will focus on reducing our cost to serve, namely on the retail business that we have in Spain. Having said that, at the end of the day, we keep high potential to grow and very strong execution capabilities that I intend to continue to use in the future.
Thanks for the color. Now, if we look at Sabadell, it's come a long way, of course. Looking at profitability, the bank now generates 14.5% return on tangible equity, and you're guiding to 16% in 2027, which is when your business plan targets ends. How sustainable do you think this is when you look at these profitability levels in the outer years?
Two different messages. Number one is, the more we see of the year, the more we find the right trends that ratify us on our guidance in terms of profitability. When I think about the future, what comes to mind are precisely these trends and the reasons that underpin them. We are seeing very strong growth on volumes that come from the good behavior of the Spanish economy, plus the good behavior and the unique kind of value proposition we have in Spain that is resulting in an NII that is going on the right direction. We are also seeing strong underlying activity on everything that generates the growing trend on the fees part of the world.
We are seeing, let's say, all the income side after we bottom down on Q1, going on the right direction, and we will continue to see that in the quarters to come. We don't see a stop point for this happening. On the cost side, we aim at growing. Again, we have enough details to see that this will continue to stay in a whole different direction. All of that with the right direction as well in terms of cost of risk, which results in a, let's say, clear pattern of opening the jaws looking forward. By now we can definitely kind of corroborate our intention and our guidance for 2027 of a return on tangible equity of 16%. Looking forward, we will have the time to go, but we are certainly going on the right direction.
Great. Maybe a question for Sergio, actually. When I look at your NII guidance, you've been sort of targeting growth at above 1% for this year and for 2027 to reach EUR 3.9 billion. Obviously, we've seen your Euribor six months and 12 months forward curve moving up. Maybe it's worth sort of giving us an update on sort of what you see as the key moving parts affecting your NII outlook from here.
Sure. Absolutely. NII is a combination of volumes and margins, right? Volumes have been growing nicely and have been the main driver of the growth that we have already seen in the second quarter, where NII grew 3.4%. We are expecting NII to continue growing in the next quarter, and with that, we expect to meet our guidance of a 1% growth this year and getting close to our circa EUR 3.9 billion next year. The building blocks of that is, again, continuous growth in volumes that we are seeing. Volumes are growing in Spain well in line with let's say nominal GDP, which is mid-single digit, between 5%- 6%, and that is both in the loan side and in the customer funds. The margins, initially we budgeted not considering any changes in the rates. That was the beginning of the end of last year.
Even with that, the impact of the volumes in the margins, we were expecting that to be a bit positive because of the mix of growth that we are seeing and expecting more towards the SME and in individuals more towards the consumer loans. Then on top of that, this year we are seeing rate hikes. The ECB has done two of them. It's now 2.5%, and market is expecting ECB to get to 3%, potentially higher than that. We ourselves are considering that the ECB may get to 3%. So with that, now we expect gradual increase in the cost of deposits, but we think the pass-through of these rate levels to the cost is going to be in the 30% that we're having or below. Then also continuous pass-through in the loans.
All in all, we expect a higher increase in the loan yield than the one that we're going to have in the cost of deposits. Then we expect a gradual marginal increase in margins over quarters, in the next quarters, and over time. This is explained by the fact that we are a retail bank, so the deposits reprice. The ones that reprice quite fast because they are either linked to overnight or Euribor three months, but then we have a big portion that do not reprice because they are transactional customers, transactional accounts, millions of them, and they do not reprice. Then in the loan side, we have variable rate loans and the new business.
At the end of the day, more assets than deposits that reprice, and with that we expect a positive development of the margins that we feel positive about meeting our guidance.
You said about NII being sort of a function of two things, margins and volumes. We've talked about margins, and you said there's obviously positive outlook on that given what's happening on rates. If I look at Spain, and this is a question for you both, the economy's been growing once again quite strongly when it comes to nominal GDP. Can you talk a little bit more about sort of the outlook for loan growth, what you're seeing from your clients and what you're seeing from your competitors? We've had a few Spanish banks here the last couple of days talk about increased competition in certain parts of the segments, but we'd like to hear your stance and to what extent growth can continue to come without compromising on price discipline.
Spain is the fastest-growing economy in the European Union, and this seems to be, or has been a kind of a sustained trend we have been seeing recently. In 2025, Spain grew at a 2.8% of GDP, while the average of the EU was 1.4%. Not only that, but when we look a little bit at how healthy this growth is, we see that on one end, the level of indebtedness of the real economy of companies and families is at a historical minimum. We do not see any kind of stretch element in there. We see very healthy unemployment trends. Believe it or not, being under 10% for the Spanish economy is amazing. We see that this strength has fundamental reasons that will continue for quite some time. This is what is going to drive the growth of the credit demand in the years to come as well.
When I think about this kind of competitive landscape, I think we have different stories for different parts of the lending business. On the mortgage end, the competition is aggressive. I would say that the prices on a standalone product bases are not competitive. What we all do in Spain is we cross-sell products in a way that the overall sale moment brings us to levels of risk-adjusted returns over 20%. We have found the mechanisms to, at the point where we sell the mortgage, complete the value proposition for the customer with other products that increase the level of profitability on that end. Competition is strong in there as well. On consumer loans, we see very strong growth, double-digit growth on the market, and we are sitting comfortably at that level.
What is unique for some players like us is that we are able to deliver that growth, growing with existing customers through pre-approved loans. We understand the profile of the customer, and we are pre-approving loans for them, and therefore, being able to grow with the system with our existing customer base, which is way better in terms of credit quality. On SMEs, I would say the specialization level comes with a margin that we are able to achieve, and we have the right level of differentiation. When I say overall, it is a market where we see healthy competition, but we feel that it is the right way to go.
Sergio, anything you would like to add on this?
No, I think it was very complete.
Maybe moving on to non-interest income growth, which of course remains a focus. I think you're anticipating growing at mid-single digit to 2027. Obviously, inflation is higher than expected, right? In Spain, it's running at around 4%. Can you share your fee expectations across different products? And how we should think about also your partnerships in the outer years.
Yeah. Let me start probably by sharing a little bit, again, the underlying factors that explain our guidance, and what are we seeing. On fees, I'd say on the asset under management world, what we are seeing is very strong growth of the volumes. We grew year-on-year 11%, and fees kind of go along with this level of growth. On the lending side, so the CIB, what we are seeing also is a very strong pipeline of transactions, and we are kind of going on this flight to quality in terms of the quality of our earnings, to more specialized businesses like debt capital markets, equity capital markets, and M&A. We are seeing, again, strong activity on those areas.
Then on the payments space, again, we continue to see a healthy growth, which happens not only on the total volume of the operations, but also on the number of transactions. That shows that the underlying growth is also strong. In terms of partnerships, we recently announced that we have extended our agreement with Amundi. This comes as a result of the fact that we believe, and we are comfortable with this, let's say, industrial model that puts together the scale of a big partner who can devote resources to build the best possible product for our catalog to put it in front of our customers. On that situation, we were not that happy with the economics of that because that agreement came from back in 2020 when the bank was in a way kind of hungry for capital.
We have kind of reshuffled the numbers of that partnership. We will start to see the results of that in the results of this Q3 that will happen at the end of October, if I am not mistaken. But now we have kind of the right partnership in place for the asset management business. On top of that, we have partnerships as well, very similarly on the insurance business with Zurich, and some others, where we believe that probably it does not make for a bank our size to develop the full complexity of the product, but we want to provide this level of quality to our customers.
When it comes to your merchant acquiring business, do you intend to revive the disposal of that to Nexi?
We were in conversations with Nexi. This is something that in the process of the hostile takeover kind of was put on hold, and then it was decided to. We both decided to let it go. We are comfortable with where we are. We are market leaders on the merchant acquiring business in Spain. We have a 20% of market share. We have all of the alternatives open, but we do not expect to see anything change anytime soon.
Makes sense. Maybe a question for Sergio then on asset quality. It is something that does not come up anymore in questions almost. The provision in this cycle has turned out to be obviously better than anybody would have expected. You got it to 40 basis points cost of risk for this year, and for 2027. You have proven to be able to sort of reduce provisioning needs, but also have updated business mix post the sale of TSB. How should we think about this cost of risk guidance and any additional color you can share?
Yeah. We see cost of risk stable at the 40 basis points. Last year was a bit better, based on different one-offs and provision releases. We see that the provisions that we have had in the first half of the years are the ones that we should get in on a recurrent way. This is based on that the book, actually, we see an improving trend on credit quality. We are seeing non-performing loans going down and the book going up, and as a result, the non-performing loan ratio going down remarkably, 2.5% at the end of last quarter. Almost 40 basis points reduction year-on-year. We have, as we measure, a lower probability of default in the new business that we produce, and that is continuously kicking in the quality of the credit book.
As you said, the mix that we are producing, we are producing a bit more in a relative basis or consumer loans. We are also boosting our SME business. Because of the mix, we think that our cost of risk is going to be rather stable, and this is this combination of actually an improving trend in the existing book, but a slightly different mix in the new business. There is a lot of noise, of course, with the conflict, with the oil prices, but Spain has proven to be quite resilient. I think that the energy mix that we have in Spain is a singular one with a lot of renewable sources of energy. We have seen that our companies have been able to find ways to overcome these different shocks and the picture for credit quality is stable and positive.
Marc, anything you want to add?
I think he has covered it all. I am glad that these kind of questions do not come up.
Don't come up anymore. Yeah, but these things, it's always.
That's great, but this is the news.
It's both comfortable and uncomfortable, to be honest with you.
Yeah.
Because these things, you know how they work. Let me talk about capital returns, because obviously this remains an important pillar of your investment thesis. You're running at about 13.1% CET1 ratio. You've set your payout at 60%. This year, you've paid your first interim distribution through a share buyback rather than a cash dividend. I think this is an important point, so maybe let's spend a bit of time elaborating on your shareholder remuneration policy and explain whether there's been any changes in your approach to how you think about capital distribution.
Okay. The share buyback thing on this kind of first interim distribution, I would say that has been quite exceptional for us. The reason for it is that as you might know, we decided to distribute a cash dividend, a pretty meaningful one, after the sale of TSB, which resulted on kind of returning the capital to the shareholders. That cash part of the dividend that had been paid kind of made us think that the idea of a share buyback that in a way kind of shows as well the value of the business was the right decision. The remuneration policy remains unchanged. There is a payout of between 40% and 60% in our policy. We have been paying 60% so far of the net profit. On top of that, we distribute any excess capital over a 13% on our CET1 ratio.
We typically have done that through, let's say, this 60% being paid as a cash element and the excess capital being remunerated via a share buyback. This is what we have historically done. Probably in the future, the board will decide, but it's probably what will still remain.
Thank you for that. That's very clear. Maybe then going back to Sergio on costs.
Yes.
Keeping costs in check is never straightforward when we account for inflation, IT investments, and those are obviously both very important themes, and banks are increasingly looking at ways to optimize that. What's the outlook for costs at Sabadell when we look ahead, and what flexibility do you retain as a management team to keep them under control?
Yes. We were expecting cost to growth at around 3% this year. We were happy to share with the market that we have improved slightly this guidance. So we see cost increase clearly below 3%. On the three components that we identified below the cost line, which are in the first hand, the personal expense, we have been able to execute a pre-retirement program this year that has affected a little bit more than 400 people. With this, we are able to actually reduce the headcount of the bank. This is thanks to the different initiatives of efficiency, digitization, and improvements in the process that we have been running so that we can do actually more business with less people.
With this, despite the inflationary environment, w e feel comfortable that we will be able to grow the labor cost at low single digits. Then in the second component of the cost base is the general expenses. General expenses also connected with all the initiatives, all the technology deployment that we are doing, we think are going to be rather flattish, the cost in general expenses. Then the third component are the amortizations coming from investments, where here clearly technology is the name of the game, and we keep investing as much as we need to support the business and to develop the business. The amortizations are actually growing at a high single digit. All three combined deliver this 3% or below 3% growth in cost, all of them.
With this, we feel that we are able to manage people, manage general cost, and keep on investing in all the things that we need to develop in order to support the growth of the business and the quality of service.
Thanks for that. Maybe we will follow up later on technology, because I think it is an important point. But before we get there, going back to Marc, big picture view on when you look at the European financial landscape has been changing quite significantly. If I look at European banks versus international banking markets, how do you view scale and do you think you have capacity to be able to absorb the IT infrastructure? Do you see the need for Spanish banks to pursue further scale in order to compete on product offerings as well as technology?
Now that I have heard from my CFO that we invest everything we need to invest to support the business and the customer service, I feel better. On a serious note, I strongly feel that we have the right size to compete in the market we compete in, which is Spain, right? Size comes with economies of scale, but it also comes with complexity. We have been able to undertake a major technological transformation in the recent years while generating capital to fund the growth and to remunerate our shareholders. I think that there is a value on the simplicity of being a bank that sits very close to the customers and that understands the customers' needs on one end, and that has the size as well to make quick decisions and to move quickly on building solutions for these customers.
I think that this is going to be even more key when we look at the challenges we have ahead of us. Let's keep in mind that Sabadell is not a super large bank, but we spend EUR 500 million on IT on a yearly basis, and we still have the right capital to, again, finance the growth and to pay our shareholders, right? So at the end of the day, I do not think it is about the size. I think it is about making sure that you understand what your customers need and being quick and nimble on delivering these solutions to customers.
I think you have answered, but I am going to put it less elegantly and be more direct. Do you see more need for M&A in Spain, or do you think this is?
When I look at the banks in Spain, I believe that we all feel the same way, which is that we have plenty of room to deliver value on a standalone basis. While this stays this way, nothing is going to happen probably in terms of consolidation in Spain. Sabadell should be competing head-to-head with anybody is on the relationship banking space. By that, what I mean is on the high-value customer segments. This kind of entails on one end SMEs and on another end, on an individual's world, private banking and personal banking. What is the reason for that? Because we have the right to compete in there. We are a bank that is recognized as a professional bank, as a very close bank.
We have developed these throughout the years and when I look at where do we sit in terms of market shares currently, and just to name an example, we have one out of two companies in Spain are customers of Banco de Sabadell. We only have a 9% of lending market share for SMEs in Spain. That means that we have a huge margin to grow on the SME space. If you think about, for example, mutual funds, we have a 5% market share in Spain. Mutual funds is the target product for private banking customers. All companies have owners. All companies have executives. We have a long way to go to capture these opportunities, to acquire these customers, and to make them grow.
It is a segment as well that makes us less vulnerable to what we are seeing in terms of risks of de-intermediation that might eventually come at one point in time in the future with AI. The new entrants also landing with this platform banking model that develops one things and lands in 80 different countries. We believe that stressing out the importance of relationship banking and competing and becoming the best bank on those segments, we will have the right competitive bank to compete in Spain.
Anything you want to say on Singular Bank?
Yeah, Singular Bank, it just didn't fit our moment or our business at the point in time it happened, so we were not interested on acquiring it. That's as much as I can say.
Thanks for the question.
Thank you.
Any more from the audience? I don't see a hand. Oh, there you go. There is one hand. Microphone is coming from the right side, yeah.
There was a gentleman with a coffee, not a microphone.
Yes. Oh.
15 years ago or that, we would be having discussions here about problematic real estate loans. Obviously, the Spanish economy has taken back, including return to real estate development and operations from both a regulatory and a bank management perspective. Do you have the capacity comfortably to meet the new requirements from this area, and could you comment on the quality of what you're seeing in the real estate space?
Yeah. Thank you very much for the question. I think that 15 years ago, with the, let's say, geopolitical situation, we would be talking about everything having stopped, right? Everyone kind of being on hold in terms of making investment decisions. I think we have developed this strong resilience after a global pandemic, after the Ukraine-Russia war, after the cost of living crisis, after, let's say, the geopolitical volatility that I think has strengthened the quality of the growth that we are seeing. In terms of the real estate situation in Spain, as you know, we had a big bubble that burst right after 2008 and for quite a long period of time. What we have seen in recent years is that the thing has gone the other way around.
We have had a lot of immigration coming into Spain, a lot of regulation going into the real estate market, trying to, in a way, kind of patch the situation. I wouldn't say solve. This has resulted in an imbalance that has, at the end of the day, resulted in a lack of offer. Spain today has a problematic, that is that the prices of the housing have gone through the roof, and now there is a little bit of, let's say, a consensus that everybody needs to work on the direction to solve this problem. Solving the problem means building more houses in Spain. We have been having conversations, as you can imagine, within the banking sector, with politicians and so on. We are more than willing to contribute to solve this problem, playing the role we need to have.
But we do not see any, let's say, typical risk on this situation that would be more coming from the credit quality part of the story. What we are seeing is that we need to find a way to speed up authorization processes for new houses, finding new places to build houses in Spain, and making the financing for that kind of flow through the economy to solve the problem that risks eventually, at some point in time, if it doesn't get solved, to become kind of a bigger problem.
It's actually on top of the political agenda. The two main topics in a recent survey were housing and immigration, so there is this big imbalance between demand and supply. That's going to be important for the campaign and for the new elections. If there's no other questions, I'll go with one more that I've been asking also to some of your peers. We've seen more and more markets see new entrants in the form of digital offering from banks. We've seen players like Revolut, but also JPMorgan Chase have either entered or are in the process of entering the Spanish market. You've been in London through the lens of TSB for years.
You've now moved back to Spain. How do you assess competition on this topic, and how do you see, more importantly, your market positioning compared to other online and digital platforms?
Yeah. Let me start by saying, and with this kind of views, having spent some time leading a retail bank here in the U.K., but banking in Spain and in other countries is very different. Banking in Spain is more relationship-based. You, in a way, become the customer of a bank, and you stay the customer of a bank forever. Having said that, I don't want to underplay the threat that the new entrants mean for us. I think that they're going to have an impact on, I'd say, on one end, on raising the bar in terms of the quality of the functionalities we will need to provide to the retail space, and we are working on making this happen. I also think that we are targeting different customers or different models.
What we do, we certainly use attractive rates to acquire new customers on the digital space, but we do it with a very clear path to loyalty strategy. We are successful at doing that. We know that one out of two newly acquired customers to the bank, after one year, we become their main bank. We know that one out of two will bring us their payroll in the period of one year and will make their usual payments with us in the period of one year. Our model looking forward, as I said at the beginning, is going to be centered or focused on this idea of developing strong relationships with customers. That's what we will build our value proposition around.
Great. Super. I think time is up anyway. I want to thank you both for sharing your insight.
Thank you very much.
It was great to chat to you, and thanks for everyone and for coming in.
Thank you.